About $15 trillion, or 38 per cent, of the world’s foreign direct investment (FDI) in 2017 was “phantom capital” that was tailor-made to trim tax bills of multinational corporations, and tax havens were being used to funnel these investments, according a study put out by the International Monetary Fund.
The share of such investments in reported FDI has shot up by roughly seven percentage points since 2010 and serves to skew the global FDI data, shows the study by the International Monetary Fund (IMF) and the University of Copenhagen.
To put it in perspective, phantom capital in 2017 was equivalent of the combined GDP of China and Germany in that year. The surge in such investments reflects failure of increasing global efforts in curbing tax avoidance.
Roughly a half of the phantom FDI — “investments that pass through empty corporate shells” with no real business activity — passes through just Luxembourg and the Netherlands. Once Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius are added to the list, these 10 economies host more than 85 per cent of all phantom investments, the study finds.
These nations typically have low tax rates.
“FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity,” the report said. However, phantom capital is typically “financial and tax engineering” that “blurs traditional FDI statistics and makes it difficult to understand genuine economic integration”.
“Luxembourg, a country of 600,000 people, hosts as much FDI as the US and much more than China,” the report says. At $4 trillion, that’s $6.6 million for each Luxembourger. “FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy,” it adds.
The phantom FDI phenomenon affects “virtually all economies”, no matter their size or level of development. Across all economies, the average outflows towards overseas shell firms represents 25 per cent of the total FDI. —FE